Let's say we are looking at a non-liquid equity ticker and a slightly OOM option on it. The problem is that if we buy delta to hedge it, it could move the underlying market and push the option to be ITM.

How do we delta hedge this position on the date of expiry?

  • 1
    $\begingroup$ By just using the underlying... you can't. Pin risk is, in fact, a risk because you cannot hedge it easily. So the only way is to use other options and avoid being caught not ready when the moment comes. $\endgroup$
    – Lisa Ann
    May 23 '19 at 18:10
  • $\begingroup$ The technical point here is that options such as you describe have a very high Gamma, and so are difficult/impossible to delta hedge. As LisaAnn suggests, such options need to be monitored vary carefully, perhaps by people specifically assigned to this task and using ad-hoc approaches. $\endgroup$
    – noob2
    May 23 '19 at 18:18
  • $\begingroup$ @noob2 understood. What I am wondering is the ad-hoc approaches that people use. $\endgroup$ May 23 '19 at 19:28

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